Report: Economy Has Peaked

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Report: Economy Has Peaked

NEW YORK – The longest U.S. economic expansion, now in its 10th year, has peaked as business and consumers begin to feel the effects of a battery of interest rate hikes by the Federal Reserve, the Conference Board said on Monday.

The research group said in an analysis that the first quarter of 2000 is expected to be the fastest growing period of the year with Gross Domestic Product rising by 5 percent on a year-to-year basis. But that growth in year-to-year GDP is forecast to ease to 4.4 percent by the fourth quarter, the Conference Board said.

"Even at these growth rates, the Federal Reserve Board will be disposed to raise short-term interest rates for the foreseeable future," said Gail Fosler, Conference Board senior vice president and chief economist, in the latest issue of her monthly newsletter StraightTalk. "In this environment, business will encounter both top line and bottom line pressure, with the negative impact on profitability showing up in the second half of the year."

The Fed, in its bid to keep inflation out of the go-go U.S. economy, has raised the federal funds rate by 1.75 percentage points since June 1999.

Fosler called "more significant" a projected slowdown in U.S. market growth, which represents domestic demand by adding GDP with imports and subtracting exports. That growth is expected to shrink to about 4.5-5 percent by the fourth quarter from about 6 percent in the first quarter.

The Conference Board said the widening trade deficit can also be a drag on growth when interest rates are rising and growth is stabilizing. According to the Conference Board, the trade deficit grew by $300 billion since the beginning of 1997 as imports have accelerated and export growth has declined.

"With stronger growth overseas and some evidence of reduced import growth, the trade deficit should stabilize but not improve," Fosler said. "In other words, the ... foreign productive capacity that was so beneficial to both the U.S. and the rest of the world in 1998 and 1999 is here to stay."

Fosler said the boom in the housing market that spawns large increases in consumer spending on big-ticket items had driven the surge in U.S. demand. But the conditions that facilitated the housing upswing – low mortgage rates and cyclical surge in real wage and salary income – have changed.

What's more, the business investment that helped fuel the first quarter growth surge was mostly a "lagged response" to the year 2000 computer problem at the end of 1999, Fosler said.